Africa, final frontier for resource discovery

By Paul Collier

In the coming decade, extraction of oil, gas and mineral ores will constitute by far the most important economic opportunity in Africa’s history. Africa is the last frontier for resource discovery, having long been relatively neglected by mining and other resource-extraction companies, owing to difficult political conditions. However, rising commodity prices are overcoming reluctance, and prospecting is generating a multitude of new discoveries.

Given that resource extraction per square kilometer in Africa is about 20 percent of the Organisation for Economic Co-operation and Development (OECD) average, the total volume of extraction could easily grow fivefold. High prices and future discoveries will generate money flows so vast that, if properly managed, they could transform desperately poor parts of Africa into regions of prosperity. Certainly, income from resource extraction will dwarf all other financial flows there.

However, too often in Africa’s history, money that should have financed productive investment has been looted or squandered. The challenge now is to prevent the continent’s sad history of exploitation from repeating itself during the coming era of massive resource extraction.

Whether natural resources are plundered or harnessed for development depends upon several factors. The first task is to capture for society as a whole enough of the value of the extracted resources. This, in turn, requires a proper procedure, based on transparent competition, for the initial sale of prospecting rights, as well as a well-designed tax system to collect revenues from subsequent corporate profits.

Some recent sales of prospecting rights in Africa have been spectacularly deficient in terms of transparency and competition. In Guinea, for example, rights that appear to have been awarded without significant benefit to the public treasury were swiftly re-sold for several billion euros.

Second, a substantial share of the revenues should be invested in assets rather than used to boost consumption. To do otherwise is to infringe upon the rights of members of future generations, to whom natural assets also belong.

Unfortunately, these rights are often violated. Cameroon, for example, has depleted much of its oil, using the revenues overwhelmingly for consumption. As a result, its current level of consumption will be unsustainable when the oil runs out.

Finally, revenues should be open to public scrutiny and their efficient use, both for investment and consumption, must be ensured by institutional mechanisms that impose clear accountability on public officials.

However, revenue and expenditure transparency alone is not enough to ensure good use of natural resources. The many decisions required to ensure success must be gotten right not just once but repeatedly, though, without such transparency, the risks of corruption and misallocation obviously are much higher.

Transparency would also foster trust between companies and local communities. So far, communities in the vicinity of extraction operations have often been hostile to the process, seeing themselves as the victims of environmental damage, while domestic elites and foreign companies are presumed to be the primary beneficiaries.

Such hostility has made the local operations of extractive industries problematic and costly: witness Royal Dutch Shell’s experience in the Niger Delta. Attacks on installations have often escalated to the point that overall supplies are significantly reduced and less secure. So, without transparency of revenues and their beneficial use, resource-extraction companies inevitably become the targets of local suspicion.